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Conduct risk MI in an era of changing supervisory scrutiny

Since the financial crisis, the supervision of conduct risk has been gradually but radically transformed. This has led to increased senior management accountability and more-wide ranging supervisory expectations. Understanding the change in supervisory approach and expectation is essential to the design and operation of firms’ conduct risk management information (MI).

At a glance

This report is aimed at Board Members, Senior Managers and Executives subject to regulatory accountability regimes. In short it:

  • Summarises how conduct supervision has evolved in the last few years, particularly its focus on customer outcomes and potential harm, and firms’ business models and culture.
  • Sets out how, spurred by this changing approach, supervisors are likely, in practice, to probe and challenge on conduct risk.
  • Identifies 5 supervisory priorities that need to be captured in firms’ MI.
  • Explores what types of MI firms need to demonstrate that their Board and Senior Managers are monitoring these conduct risks and outcomes in the way, and to the standard, that their supervisors expect.

A snapshot of each the five supervisory priorities is available on the tabs below.

We set out some examples of the lines of enquiry supervisors may pursue during their interactions with firms. These are accompanied by examples of MI that the Board and Senior Managers could use to assure themselves that their firm is identifying and managing these risks appropriately, and monitor the customer outcomes being delivered.

More information and examples can be found in our full report which is available to download above.

Vulnerable customers

Regulators are attaching increasing importance to customer vulnerability and are embedding it in their supervisory programmes.

Possible areas of supervisory enquiry

  • The identification of vulnerable customers.
  • The monitoring of existing customers for signs of vulnerability or changes in circumstances that may lead to vulnerability.
  • How the firm’s products and/or services meet the needs of vulnerable customers.

  • Examples of MI

    • Periodic reporting which demonstrates that the firm understands the profile of its vulnerable customers. For example, data on the number of vulnerable customers and the point of the customer journey at which customers are identified as vulnerable.
    • Data on the actions being taken by the first line to monitor/assist customers when they are identified as vulnerable.

Cross-subsidisation and price discrimination

The increasing importance supervisors place on understanding firms’ business models is leading to greater scrutiny of pricing practices that may result in financial and distributive unfairness for customers.

Possible areas of supervisory enquiry

  • The existence of cross-subsidies between different parts of the business or groups of businesses. For example, legacy customers vs. new customers or new customers vs. renewal customers.
  • Justification for charging different prices to customers, particularly when the cost to serve or underlying price is the same.

  • Examples of MI

    • Reporting which demonstrates that the business has identified and is monitoring all material cross–subsidies, for example, analysis of fees paid by different customers for the same product.
    • Data on actions take to rectify pricing practices that are resulting in unfair outcomes or harm to customers.

Value for money

Supervisors are increasingly looking at the value for money delivered by financial products and services. In the UK, the FCA has sought to address poor value offerings across a number of sectors while supervisors in Europe have stepped up their scrutiny of value for money in investment funds.

Possible areas of supervisory enquiry

  • The value for money of the firm’s products and services.
  • The firm’s most profitable products/services.
  • The fees and charges that are monitored from a conduct risk perspective.

  • Examples of MI

    • Periodic reporting that demonstrates the business is monitoring the value for money of its products and services. For example, data on the number and level of fees applied by product/service.
    • The results of monitoring to ensure that individual products and services do not produce unexpectedly or disproportionately high profits or margins. For example, in excess of plans or projections.

Risks from technology-enabled innovation

Understanding the risks associated with firms’ use of technology‑enabled products and services is already high on the supervisory agenda, which seeks to balance encouraging responsible innovation with consumer protection.

Possible areas of supervisory enquiry

  • The technology-enabled products and services offered or sold by the firm.
  • The oversight and challenge around the development and use of technology-enabled products and services.
  • How the firm ensures that the use of technology does not reduce access to products and services.
  • Examples of MI

    • Periodic reporting which demonstrates that technology-enabled products and services are being monitored appropriately. For example, whether they are being sold to or used by the intended customers.
    • Comparisons of the metrics for technology-enabled products and services against traditional ones to determine if the innovative ones are producing discriminatory results.

Firm culture

Culture has become a key focus for supervisors in their strategic response to the global financial crisis and subsequent misconduct scandals. Supervisors will challenge the Board and Senior Managers on how they assure themselves that their target culture is operating in practice and delivering acceptable outcomes, from a regulatory, strategic and commercial perspective.

Possible areas of supervisory enquiry

  • The extent to which the firm and its employees prioritise good customer outcomes over mitigating risks or commercial benefits.
  • The extent to which the firm’s culture attaches the right importance to issues such as vulnerable customers, cross- subsidy, etc.
  • The values and attitudes of the staff and how these are developed.
  • Examples of MI

    • Reporting on behaviours which may indicate an underlying culture issue e.g. timeliness of issues/breach reporting, number of whistle-blowing reports.
    • Results from staff surveys intended to capture the views of staff on whether the firm is treating customers fairly.
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